91. Parent Computer Corporation acquired significant influence over Child Computer Company on January 2
by purchasing 20 percent of its outstanding stock for $100 million. Parent attributes the entire excess of cost
over book value acquired to a patent, which it amortizes over 10 years. Child Computer had earnings of $100
million and declared dividends of $30 million during the year. The accounts receivable of Parent Computer
Corporation at December 31 included $600,000 due from Child Computer. Parent Computer Corporation
accounts for its investment in Child Computer using the equity method. Parent Computer Corporation considers
reducing its ownership from 20 percent to 19.5 percent so that it no longer has to use the equity method.
Comment on the ethical implications of this possibility.
92. Describe the accounting and reporting of investments in common stock.
OVERVIEW OF THE ACCOUNTING FOR AND REPORTING OF INVESTMENTS
IN COMMON STOCK
93. Describe the accounting for minority, active investments.
MINORITY, ACTIVE INVESTMENTS
94. Why do accountants sometimes refer to the equity method as a one-line consolidation?
95. Discuss the accounting for majority, active investments.
MAJORITY, ACTIVE INVESTMENTS
96. Describe U.S. GAAP and IFRS requirements in accounting for the business combination.
THE PURCHASE TRANSACTION
97. Describe what a consolidated income statement shows.
98. What is a noncontrolling interest in a consolidated subsidiary?
99. Describe the limitations of consolidated statements.
100. Describe the U.S. GAAP requirement in accounting for joint venture investments.,
JOINT VENTURE INVESTMENTS
101. Variable interest entities have what characteristics?
VARIABLE INTEREST ENTITIES
102. What are qualifying special purpose entities?
QUALIFYING SPECIAL PURPOSE ENTITIES
103. On July 1, 2013, Mecca Group purchased for cash 35 percent of the outstanding capital stock of Wembley
Studios. Both Mecca Group and Wembley Studios have a December 31 year-end. Wembley Studios, whose
common stock is actively traded in the over-the-counter market, reported its total net income for the year
to Mecca Group and also paid cash dividends on November 15, 2013, to Mecca Group and its other
stockholders.
104. The equity method of accounting should be applied by an investor to an investment in the voting stock of
an investee of 20% or more of the voting stock of the investee. An investment of 20% or more of the voting
stock of an investee should lead to the presumption (absent evidence to the contrary) that an investor has the
ability to exercise significant influence over an investor. The presumption in applying the equity method is that
an investor has significant influence over the operating and financial policies of an investee even though the
investor holds 50% or less of the voting stock of the investee.
Required:
Identify events or circumstances that suggest that an investor has significant influence over an investee.
Ability of an investor to exercise significant influence over an investee may be indicated in the following ways: